Blind bets on IPOs can be risky if market sentiment changes

If the company's quality is sound but valuation is high, wait for a correction

- SANJAY KUMAR SINGH & KARTHIK JEROME

Individual investors sold over 50 per cent of the shares (by public offerings (IPOs) within a week of listing, and 70 per cent within a year, according to a study by the Securities and Exchange Board of India (Sebi). The study compiled data from 144 IPOs listed between April 2021 and December 2023.

Lure of quick gains

Experts attribute the short-term approach adopted by retail investors to several factors. Most investors lack the necessary skills, nor do they dedicate the time and effort required to analyse each IPO thoroughly. "Since investors lack conviction in the IPOs they invest in, they are unable to hold on to them for the long term," says Deepak Jasani, head of retail research, HDFC Securities.

He cites a couple more reasons for early exits. "Most IPOs are offered at high valuations. After listing, many fall in value, so investors exit early to avoid possible losses," he says.

In bullish market conditions, a large percentage of IPOs provide listing gains. "Most retail investors do not understand the fundamentals of the company, nor read the red herring prospectus. They simply bet on the likelihood of listing gains in a bullish market," says Ankur Kapur, head of investment, Plutus Capital.

Many investors also rotate their funds into other IPOs. "The reduced timeline for IPO listings allows investors to quickly assess their positions and reinvest their capital in new opportunities," says Sarvjeet Singh Virk, co-founder and managing director, Shoonya by Finvasia.